17. The Economics of Healthcare, Debt, and Social Security

0:00 Welcome to The Rubber Meets The Road Economics, the podcast where we explore the driving forces behind today's economy and their real world implications. Join investor Hunter Craig as he interviews professor Edwin Burton from the University of Virginia, delving into the complexities of economics with clarity and insight. Whether you're an economics enthusiast or just curious about how economic policies affect your daily life, you're in the right place. Let's get started. Today is February 27th, 2025. We're here with world renowned professor Ed Burton from the University of Virginia. Professor, we are in a Economic brew of rising interest rates, sticky inflation, debt, 36 trillion and growing, annual deficit approaching 2 trillion, Department of Government efficiency doge is making significant cuts in the federal workforce.

0:56 Is this good or bad for economics? The economy always suffers when people lose jobs, whether it's through the efforts of Doge or through the regular economy. Those jobs will have to be made up for folks, and that's not going to be easy to do that. Now, looked at from a different point of view, if you're trying , slice the cost of government, those are all pluses, but in terms of the macroeconomic effect, That'll add to unemployment. We have a deficit of a couple trillion a year, almost just shy of two trillion. Total debt of over 36 trillion, growing to 50 trillion in the next seven to eight years. You've stated before that, you can't move the needle without dealing with health care. How would you deal with healthcare?

1:38 Let me say at the outset that this is not uniquely a U. S. problem. It's a problem with a couple of factors. First of all, we've so greatly improved the world's health capabilities that people live a lot longer than they did, say, 50 years ago. Second, the fertility rates have dropped throughout the developed world and even, China is struggling to maintain their population as well. The number of children born is not enough to replace what we lose from normal mortality. So most populations in the developed world would be shrinking were it not for some form of immigration. And that's true of the U. S. It's really notoriously true of a country like Japan, which has been shrinking for quite a number of years.

2:22 But it's also going to be true of China. They're going to lose population as well. And the population that you have is getting older, much older. The demographics look for further concentration in the oldest ages. And that's where a lot of your health care concerns are. So health care costs, if you continue to provide the same health care we now provide in the U. S. It's going to cost an enormous amount more than it does even today. And that's true of England, it's true of France, true of Germany, it's true of China, it's true of Japan, it's true of every place in the world. So that's the nature of the problem. Question is how do you solve it? And if you dial the clock back 30 or 40 years ago, well, I remember many discussions about why don't we just adopt what goes on in Europe?

3:11 Europe has government provided healthcare for everybody, and that all seems to work fine. Well, with an ocean in between us, a lot of Americans didn't know the reality of what goes on in Europe and in the UK. People that live in the U. K. will tell you right away that most low income to middle income people get almost no health care at all. And that's true in most European countries. And especially, they don't have access to surgeries. You don't have older people getting massive numbers of surgeries in a place like England. And when they list the deaths, they almost never die on a surgical table because they never really get there. They just die wherever it is. Again, whenever you have a government controlled health care program.

3:55 Rich people do great. They basically avoid the health care program and they hire private sources or fly themselves to India or somewhere over the U. S., somewhere where they can get access to private doctors. But the average person, he's stuck with the government provided health care. And what happens over time, as the costs rise, they just quit doing certain things. Every day, the list of things that they'll do for you in, countries like France or the UK just gets smaller and smaller. So they're kind of quietly eroding the national health care system. And they'll be the first to admit it. That's a huge political issue in the United Kingdom right now. There's a lot of discussion about it. In our country, for a long time, we had essentially a private health care system.

4:40 Prior to 1963, the health care system in the U. S. was largely private, with a number of charity hospitals sprinkled throughout the country. Every major city had a charity hospital, and a number of private hospitals, and when you went to a private hospital, the first question they ask you is, how are you going to pay? And if you said, I can't pay, they said, there's the door. And you left. That, well, I remember when I was, as a child, I, we had that kind of a confrontation with my grandfather, who was quite ill, could not get him in a hospital, and he died out in some facility somewhere, because he couldn't. afford some kind of surgery. And that was quite common. That was not an unusual story.

5:22 Then in 1963, John F. Kennedy had proposed something as a senator that ultimately became the Kerr McGee Act, which became Medicare. And originally, Medicare was just to pay one fourth of health insurance. You were, To go out and get your own health insurance, and then the government would pay one fourth of that cost. And that was billed to cost the country as a whole about 2 billion a year, as we projected out. Wouldn't that be nice if it was 2 billion a year? If it was truly 2 billion a year, or even a hundred times that, we'd be in great shape. And what is it today? Over a trillion a year. It's trillions of dollars, but it's really where it's going.

6:02 There's no slowing it down because we have more and more aged folks. And by the way, they're less and less healthy. Our aging population feels like they don't really need to protect themselves very well, so they tend to overeat and get very little exercise, retire as early as possible, and the net result is we spend an enormous amount of money on health care for people who only have a year or two left to live. A significant part of the health care expenditures are in that category, and they tend often to be people, some people have illnesses just because they couldn't help it or genetics. But America is almost unique in having a large number of people who kind of eat their way into health problems.

6:43 If you go on the streets in a big city in America and you watch elderly people walk down the street, you'll see it right away. Compare that to being in Paris or Rome to what you see. You see a lot of thin people in Paris, thin, older people. You don't see a whole lot of thin, older people. In America, the thin, older people tend to be rich people, and the not thin, older people tend to be poor people or middle income people. And they have access through Medicare and Medicaid, to a lot of health facilities. So, we don't take proper care of ourselves, and we're getting older. And so we're going to have a whole lot more people hitting the health care system than it there today. But the biggest difference between 1963 and today is, before 1963, I told you the story of how we tried to get my grandfather in a hospital and we couldn't pay, so he couldn't get surgery.

7:35 Now, somebody would think that was almost criminal for the hospital to do that. Oh, they've got to take him in. And in my grandfather's case, not to throw cold water on my grandfather, but he was a hopeless alcoholic and smoked, two, three packs of cigarettes every day. And he was dealt some pretty good genetics, but he took a sledgehammer to the genetics and there he was. So, the current thought is if someone like my grandfather shows up at the hospital who essentially created his own health care problem, which he did, taxpayers of the country should foot it. And that's what's going on. So people feel like their health care is a right, that you can't deny health care on the basis that someone can't afford it, and it doesn't matter why they have bad health care.

8:20 They may have You know, they could be a bank robber going into a bank, trying to shoot up the bank, and they actually get shot by a policeman. Okay, fine. That's how they got shot, but then they go to a hospital, and they become the number one project, and taxpayers paid for all that. And they do. It doesn't make any difference why you get into a hospital. If you're just an American citizen these days, they can't turn you away. And people know that. So if you know that, why take any special care? Why go out for that next run or be careful about your diet or anything else? When you had to pay for your own health care, and you knew that you might not be able to get any, you might have a second thought about that third cheeseburger or about that fifth drink one night.

9:04 But if somebody else is going to cover all your health care and you don't have to worry about it, you just do whatever you want, there's a tendency to maybe not take as much care of yourself. So And then when you use the health care system, what do you want? Well, you want everything. Imagine if you had a free card to go to the grocery store. If we gave everybody in America a we said, we think everybody has the right to eat. So therefore, here's what I'm going to give every family in America, a free card to buy all the food they want. And now they go into the local grocery store. What do they buy? And they take the kids with them. Well, they just buy everything. I might as well buy the most expensive things you can find or whatever, but you're not a very careful shopper. You're not going to sit there and compare the price of this to the price of that. You won't do that.

9:44 And people don't do it in the healthcare system. Most people have no idea what the cost for their healthcare is. They go in, they go to the hospital, they get something done. And they have no idea what it costs. So Adam Smith said the key to optimal outcomes is competition. How do we instill competition into Medicare? And there's a way to adopt a system similar to our car insurance, where you have catastrophic insurance, complicated subject, and you have to look at it from a number of different points of view. First of all, from the user of the health care system. The user assumes that it's a right to get free health care, and therefore they do not shop for health care. They don't care what they get charged.

10:25 And doctors know that. So, if you're, suppose you're in a business, and you know that the customer does not care what he pays, and he comes in, and he says, I want to buy a shirt, well, how about these four shirts? You're not paying anyway. Maybe you want this one and that one, and how about ten of them? So there's an incentive on the part of the hospital and the doctor, too. So you've got a shopper who doesn't care what price he's paying. And, you know, doctors are only human. I mean, it's not evil to suggest that, well, maybe this test is not absolutely necessary, but let's do it. You probably wouldn't do it if you were paying for it yourself. You'd say, well, do I need that?

11:06 Do I need really to have that? You know, I'm struck by, I went in myself one time to get an MRI, and when I got to the hospital, the lady at the desk said, your MRI has been canceled. And I said, oh, who canceled it? He said, it's been canceled. You can go home. I said, I didn't cancel it. She says, it's been canceled. I said, who has the right to cancel it? My doctor didn't cancel it. I didn't cancel it. He said, Oh, well, the insurance company won't pay for it. I said, That's not the same thing as it being canceled. I want my MRI. The doctor told me I needed one, and I'm here to take it. So I went and had my MRI, and I came out from the MRI, and the lady said, You're in luck.

11:47 The insurance company has decided they're going to pay for it when they found out you just went in and got it. And I said, Let me ask you a question. Do other patients, when the insurance turn them down, do they just get told it's canceled, and then they go home? She said, Yes. so much. No one ever gets an MRI unless the insurance company pays for it. Well, now that's interesting. Who decides whether the insurance company pays for it? it's not the doctor that's deciding whether you should have the MRI. It's some person who has no idea what the healthcare situation is, he's making that decision. And so people are not only paying too much because they kind of want everything if it's available, they're often getting the wrong things.

12:30 There's a great study by John Goodman. He took doctors who saw very similar diagnoses, and he found out if you looked at what they prescribed For the patients, they tended to subscribe similar things only in the case where the patients had the same insurance company. And if the patient had a different, same doctor had a different insurance company with the same diagnosis, they're going to describe something else. And it fit what the insurance company would pay for. So doctors look at what the reimbursement is. And they decide on that basis how to treat you. people respond to incentives is the way it works. And if you tell people that the price system doesn't matter, go into the grocery store and just prices don't make any difference.

13:13 You can have whatever you want. Then they will not shop intelligently. They will not try to get what's really appropriate for them, and if the store realizes they're going to be reimbursed for everything, they'll just give whatever they want out, but they won't give out what they won't be reimbursed for. They'll keep that, maybe sell it. And so you have a crazy system where the healthcare that people get isn't really very good. And it's unbelievably expensive, and the people that get the best health care in America are the same people that get the best health care in Europe, rich people. They do great. If you're really rich, or somehow connected, I'll never forget when I spent a fair amount of time at UVA the hospital, I don't know if you remember the room I had, Hunter, but it was the best room in that hospital, because I was Professor Burton.

14:01 I was treated like the king of Siam, and I'm sure the guy that comes in and sweeps the Ground seems to snow off the sidewalks, I bet he didn't get that room. He got some room with three other roommates somewhere in the building. So, if you don't allocate a product by price, which is, well, we don't in healthcare. Price is not the issue. Then it gets allocated by who has lots of money, who has lots of connections. And that's how you get health care. And you're, you're gonna allocate it one way or another because you don't have an unlimited amount of it. So do you allocate it by the price system or the buddy system? So if you're a well known, connected politician, suppose you're the local congressman, think you get good health care?

14:46 Of course, you get the best. But if you're the guy that cuts his grass, no, you'll wait 12 hours in the emergency room to even be seen. So, you end up with really a very unfair healthcare system, which is what we have in this country. So you've recommended a book before, Priceless, on healthcare, who is the author of Priceless? Uh, John Goodman. John Goodman, the Claremont Institute, he's, he wrote a book called Priceless, which was originally published in 2014. And I knew John, but I never read the book. And then about a year ago, I read the book, and I honestly couldn't believe it. That's one of the best research treatments of American healthcare I've ever seen. And John suggests a lot of reforms, but they're mostly, people need to know that health care costs and they need to pay for a lot of their health care.

15:34 Just like if you want somebody to take care of their car, they should pay for their, repairs. Insurance companies know that. That's why they have deductibles. If you know that the insurance company is just going to cover every wreck you have, you're going to drive quite a bit differently than if you know you're the one that has to pay. It affects behavior, knowing who's going to pay. And that's. That's what happened, that's what's happened in this country. I think our concern about health care, the drug habits that have gone completely rampant among young people in America, and it's not, you know, when you think of the drug problem, people often think poor people are using drugs. No, it's not poor people using drugs. Go to any major university in America, go to Harvard and find out how much drug use there is all over the place.

16:16 It's actually people that have a lot of resources that use drugs quite a bit. That's what drives the drug traffic in a lot of the East Coast. You'd think, do they worry about the long run consequences? We know that drugs have a terrible effect on you over time, and that's why they're not a good idea. That's why they're illegal. And even marijuana, which most students, if you poll students, they think marijuana's good for you. And we have a huge amount of evidence that it's terrible for you, but the universities won't tell them that. And certainly the drug dealers they're buying from won't tell them that. And so you have all these health problems that develop because students feel like, well, it really doesn't matter. And besides, I'm not paying for my health care anyway. If something happens, I can just go down to my friendly, hospital and they'll take me in and I'll be fine.

17:01 you're stuck in a quandary here. The heart of the problem is to run the health care system correctly and efficiently and cheaply and provide good health care means you have to turn away people that can't sometimes pay. Now, if those people happen to not be able to pay because. They just are poor and never be able to pay, then there's probably a place for the government. But that's not the system we have. The system we have applies to everybody, no matter what their income or anything else. Everybody assumes that they don't pay for their health care. There's not an employee of the University of Virginia where I work. It doesn't assume that they don't pay anything for health care. They assume they pay nothing.

17:42 the U. S. government is arguably in a debt spiral. This year, in 2025, , will spend more money on debt service than on the military. We can't solve the annual deficit problem, which is approaching 2 trillion, without dealing with healthcare and Social Security. What would you do with Social Security to solve that problem and make Social Security viable for the next 50 years? Well, I think Social Security is easy because there's a huge amount of Social Security payments going to people over the age of, say, 70, and the vast bulk of those people are well healed. They don't really need the Social Security payments. So given that much of Social Security, it's almost a reverse Robin Hood situation because poor people who work all their lives die at a much earlier rate than rich people that just live on forever.

18:33 Warren Buffett's still alive and going, Charlie Munger last is 99, but I bet there are people that cut their grass didn't. So poor people tend to die much earlier, their lives are much tougher, and they don't have access to health care and diet and everything else, so since Social Security is going to a pretty well heeled group, it would be pretty easy to You could either do it through taxes, or you could just outright say, from now on we just don't pay Social Security to people whose asset base is above a certain level or something. There's all kind of ways. Or people, a lot of people would just voluntarily give up their Social Security if they saw improvement in the system. I would. If you told me that I, if I voluntarily gave mine up, we could begin to end this system, I would give it up in a heartbeat.

19:19 So the Burton family gets 70, 000 a year in Social Security. And low income people who trigger it at 62, what do they get? They get about 18, 000 a year. So it's not very beneficial to low income people at all, because they tend to trigger it early. 35 percent of all Social Security retirees trigger the benefits early, and so they get very low benefits. People that have a lot of money or a lot of income, they can last till age 69 and it goes up 8 percent a year per year. So, Social Security actually is more beneficial to rich people than poor people. Poor people get very little out of it. Even though it's heralded as income maintenance program, it's really not.

20:01 you got rid of that, suppose you just got rid of the whole thing and quit giving benefits to fairly wealthy people and just gave people who are poor benefits as they retire, that would not be a big number, frankly. Because it all ends when they die, unless they have a spouse. I mean, you could work all your life, and if you die before you start collecting and you don't have a spouse, that's the end. You get nothing. You pay in your entire life. No affordability, your heirs get zero, unless they're minors. And if you're 60, they're probably not minors. So it's a terrible system for poor people. And it's, just look at the numbers. , it's 13%. It's six and a half by the employee, six and a half by the employer. So if you make 50, 000 a year Do the arithmetic.

20:43 That's 6, 500 a year. 6, 500 a year. If you put that in the S& P, oh my goodness, you could retire a multimillionaire. And, and a lot of them put that 6, 500 a year in all their lives and they get nothing. Zero. If you die of a gunshot wound at 59 and have no spouse, that's the end of it. So it's a terrible system. What you need to do is offer people the opportunity to save. We need to get the savings rate up anyway in this country. And you can do that with taxes. You can do whatever you want to do. Just say We'll match whatever you save up to 10, 000, we'll match it 50 cents for every dollar you save or something like that. It'll turn out that'll be a lot cheaper than Social Security.

21:25 Social Security is just a terrible thing. And I don't know why it's always had such a political defense. It's probably because people don't understand it. And I think especially low income people don't realize that they get almost no benefit out of Social Security. A handful of low income people live long enough to do any good. The people that live long enough and do well are white women who make it to 105. They do great. There are not too many of them, but they really, they, they knock it out of the park. And, you know, Charlie Munger, he did pretty well, and Warren Buffett, he did pretty well, and I'm sure Bill Gates will do great. In spite of drinking many cherry Cokes.

22:05 That's right. Well, Professor, you're the best of the best. Next podcast, we need to talk about Doge. Thank you, Professor. Thank you, Hunter. Thank you for joining us for the Rubber Meets the Road Economics Podcast. If you enjoyed the discussion, remember to subscribe and stay updated with future episodes. Join us soon for more conversations about modern economics on the Rubber Meets the Road Economics Podcast.